Month: December 2012

As the holiday season rolls around, nostalgia strikes the hearts of even our coldest grinch listeners. Looking back at the innocence of youth, we all remember the traumatic experience of learning that jolly old St. Nic, might not be real. In this podcast, the good guys take a critical look on the age-old holiday question: Is Santa Claus real? We start by examing the historical figures that gave rise to the modern day shopping mall Santa Claus and finish up by using physics to examine whether or not Santa could feasibly deliver Christmas presents to all of the good girls and boys. Thanks for listening and Happy Holidays from Chad, Geo, Mitch and Perek!

Imagine yourself with $1000, you go to the store and there is one beautiful flat-screen 60-inch TV for $899. How do you feel? Now imagine that you have $1000 and you walk into another store, where you see a wall full of 20 beautiful flat-screen TVs, all between $799 and $899, but with different features. How do you feel?

The Paradox of Choice:

The paradox of choice is a theory by American psychologistBarry Schwartz claiming that, after a certain threshold is reached, an increase in the number of choices will cause a significant amount of psychological distress. This distress, according to Professor Schwartz, can manifest itself in many ways. One way is through buyer’s remorse. The theory states that buyer’s remorse is created through increasing opportunity costs associated with increased choices. Opportunity costs associated with alternate choices compound and create strong feelings of dissonance and remorse.

As the number of choices increase, it is easier to imagine a different choice that may have been better than the one selected. The constant comparison to one’s expectations induces regret, which reduces the satisfaction of any decision, even if it fills the individual’s needs. When there are many alternatives to consider, it is easy to imagine the attractive features of rejected choices and there is a decrease in overall satisfaction.

Consider the amount of choices in a simple supermarket. There are likely to be hundreds of different options of a single product. With so many options, expectations are as high as possible. It is the expectation that the product is perfect for an individual and will have no drawbacks. This leads to expectations rarely being met, a significant psychological issue. In the example of a supermarket, a wrong product choice can be immediately put into perspective. However, for more involved decisions, the consequences of a wrong decision are significant.

Scenario:

You need to buy a box of ping pong balls for your annual christmas tournament. You know that the typical price per ping-pong ball is 5 cents (and thus you know that Mitch has been overcharging you this whole time). One box advertises: 33% cheaper! The other box advertises: 33% more balls! Which is a better deal?

Assuming one ball holds 20 balls:

33% off give you 20 balls for 66 cents. That’s 3.3 cents per ball

33% more gives you 26.67 balls for $1. That’s 3.75 cents per ball

So…. They’re not equal! Choose the discounted price rather than the increase in quantity.

Buyer’s Remorse

The anxiety may be rooted in various factors, such as: the person’s concern that they purchased a current model now rather than waiting for a newer model, purchased in an ethically unsound way, purchased on credit that will be difficult to repay, or purchased something that would not be acceptable to others.

In the phase before purchasing, a prospective buyer often feels positive emotions associated with a purchase (desire, a sense of heightened possibilities, and an anticipation of the enjoyment that will accompany using the product, for example); afterwards, having made the purchase, they are more fully able to experience the negative aspects: all the opportunity costs of the purchase, and a reduction in purchasing power.

Also, before the purchase, the buyer has a full array of options, including not purchasing; afterwards, their options have been reduced to:

continuing with the purchase, surrendering all alternatives

renouncing the purchase

Buyer’s remorse can also be caused or increased by worrying that other people may later question the purchase or claim to know better alternatives.

Cognitive Dissonance

theory of cognitive dissonance, a state of psychological discomfort when at least two elements of cognition are in opposition, and which motivates the person to appease it by changing how they think about the situation. Psychologists have focused on three main elements that are related to cognitive dissonance and buyer’s remorse. They are: effort, responsibility, and commitment. Effort is the resources invested in a purchase (material, intellectual, psychological, and others) and effort is directly related to the importance of the purchase. Purchases that require high amounts of effort but don’t bear high rewards are likely to lead to buyer’s remorse. Responsibility refers to the fact that the purchase is done out of free will. Buyers that have no choice on the purchase will be less likely to feel dissonance because it was not out of their own volition. Commitment refers to the continuing of an action. The purchase of an automobile has high commitment because the car must be driven for usually a long duration. Purchases with higher commitment will lead to more buyer’s remorse.

How do marketers use buyer’s remorse?

Buyer’s Remorse is a powerful experience for consumers. For years, marketers have been attempting to reduce buyer’s remorse through many different methods. One specific technique employed by marketers is the inclusion of a coupon towards a future purchase at the point of sale. This has many benefits for both the consumer and retailer. First, the consumer is more likely to return to the store with the coupon, which will result in a higher percentage of repeat customers. Each successive time a purchase is made and is deemed satisfactory, buyer’s remorse is less likely to be experienced. Customers can justify their purchases with product performance.

Another technique used is the Money Back Guarantee, a guarantee from the retailer that the product will meet the customer’s needs or the customer is entitled to a full refund. This technique is highly successful at lessening buyer’s remorse because it immediately makes the decision a changeable one. The unchangeability of an “all-sales-final” purchase can lead to a larger amount of psychological discomfort at the point of the decision. This makes the stakes higher, and poor choices will cause significant buyer’s remorse.

We randomly assigned 202 participants (116 females, 86 males; ages ranged from 18-63 years, with a mean of 25) to a neutral-, sad-, or disgusted-mood condition. Participants were students and local residents from the Harvard Decision Science Laboratory participant pool who responded to an advertisement offering $15 for participation. Each participant sat in a private cubicle within a laboratory. Drawing on established methods (Gross & Levenson, 1995; Lerner,

7 THE FINANCIAL COST OF SADNESS

et al., 2004), our emotion-induction procedure was the same in all three experiments. Participants first watched three-minute video clips about the death of a boy‘s mentor (Gross & Levenson, 1995) in the sadness condition, about an unsanitary toilet (Lerner, et al., 2004) in the disgust condition, and about the Great Barrier Reef (Lerner, et al., 2004) in the neutral-state condition. Depending on condition, participants next wrote an essay about a situation during which they had experienced sadness or disgust, or an essay about their nightly activities. Both before the emotion-induction procedure and immediately after the choice task, participants reported how intensely they felt 19 emotions, including emotions measuring sadness, disgust, and a neutral state.

Participants then made 27 choices between receiving cash amounts today (between $11- $80) and larger cash amounts (between $25-$85) at points in the future ranging from one week to six months (Kirby, Petry, & Bickel, 1999). Following standard behavioral-economics procedures (Weber et al., 2007), we incentivized participants to express their true preferences by randomly selecting one of the choice pairs for one of the participants in each session (median of 13 participants per session) and paying out that person‘s preferred alternative. Choices of a reward that day were paid at the end of the session in cash. Later rewards were paid by a check mailed at the later time.

results hold if we control for pre-induction emotions. Although we will not report the results, these procedures were equally effective in Experiments 2 and 3.

From a rational perspective, there should have been no carry-over of the incidental emotions induced by the video-watching and essay-writing to the financial decisions. Nonetheless, substantial carry-over occurred. Sad participants were more impatient than neutral participants in their choices, i.e., more willing to forego larger rewards in the future to obtain smaller rewards now. We used maximum-likelihood estimation to fit each participants‘ choices to an exponential discounting function, D(t) = δt, where smaller values of δ (the annual discount factor) indicate more impatience.1,2 Sad participants were more impatient, discounting more (Mδ = .21, medianδ = .04) than neutral participants did (Mδ = .28, medianδ = .19; Mann-Whitney Z = 2.04, p = .04).3 In monetary terms, whereas the median sad participant accepted $37 today rather than wait 3 months to receive $85, the median neutral participant required $56 today. Importantly, disgusted participants (Mδ = .31, medianδ = .24) discounted about the same as neutral participants did (Z = .46, ns) and less than sad participants did (Z = 1.87, p = .06). Thus, sadder was not wiser for these intertemporal choices. Even though the induced sadness was incidental to these decisions, it actually increased preference for immediate rewards whereas disgust did not.